Go Krugman… Join the Fight for Labor
I have been upset with Paul Krugman for years since he undermined the living wage movement in the 1990’s. Here is what he wrote back then…
“In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal.” (source)
He is saying that the labor market is the same as the market for products and commodities. Now we read today…
“Even more important is the fact that the market for labor isn’t like the markets for soybeans or pork bellies. Workers are people; relations between employers and employees are more complicated than simple supply and demand.” (source)
Paul Krugman is coming of age in his view of labor’s wages…
Edward,
You quoting Paul Krugman: “Even more important is the fact that the market for labor isn’t like the markets for soybeans or pork bellies. Workers are people; relations between employers and employees are more complicated than simple supply and demand.”
Of course, the problem with that position is that most corporate persons and their managements do not believe it.
They have acted on exactly the opposite view, that labor is a cost center which should be controlled by any legal measures available. Measures which would include Roger Smith’s attempt to excessively automate GM factories in the 1980s or American manufacturers’ push to move production to Mexico in the 1990s. Nothing forced them to make those decisions, except the desire for a larger corporate profit and larger executive bonuses.
And in the years since then, there has not been any significant corporate movement to reverse their course.
Force production back into this country to satisfy domestic consumption, and our unemployment and low wages problems will improve. (In the aggregate)
The argument that we MUST participate in the global economy is lunacy. No foreign country has forced us to become the world’s net importer.
I write that off to one part incompetent negotiators and one part inordinate influence by corporate persons. (Although it has occurred to me that the corporate persons probably influenced the selection of incompetent negotiators.)
Capacity and Overhead
“…labor is a cost center which should be controlled by any legal measures available.”
Should more accurately read:
“labor is a cost center which should be controlled by any measures available.” Fixed it for ya.
Att: Edward Lambert,
You have stated your preference for co-operatives (Avis?). What do you think of my equating thorough (continental European style) unionization — combined with — centralized bargaining (all similar jobs falling under one common contract with all firms) with co-operatives: for the purpose of labor market bargaining in my open thread comment?
IOW, labor would be fully involved in extracting the most the customer will pay — balancing labor’s higher income versus how much lost business — currently the exclusive function of ownership in most of our thoroughly de-unionized labor market. I call it a two-tier market because labor’s marginal utility clears only in relation to the price of other labor, not the customers’ willingness to pay.
Krugman past (or present?), et. al., did not seem to have any conception that Walmart workers for instance could double their pay — average $12.50/hr says W., to $25/hr — and W. prices would only go up 7%, not costing much business.
Even more glaring: the failure to grok that if W. prices rise because of a minimum wage rise ($15 min = $17.50 average = 3% price increase), W’s. customers would have a lot more than 3% more money to spend, likely adding much business.
How hard is that for Nobel prize winners to figure this out?
So, what do you think about virtual co-ops, Edward — did I sucker you in to centralized bargaining? 🙂
Denis Drew,
You suckered me in… I like the idea.
Edward,
Although we can all agree that a living wage is good and that people ought to have them, Krugman was right in the 19990’s (when he was more of an economist and less of a political blogger): labor wages are primarily determined by market forces, as our the supply and demand of soybeans, etc.
This is a case where legislative law does not trump economic law. Artificially increasing the wages above the wage level determined by market will ultimately result in the loss of that job or that job will have to change to be worth the new artificial rate. That simple.
The fact that we are not in an autarkic economy and that we compete with labor globally only adds to this dynamic. You cannot protect labor from global market forces without also limiting your competitiveness in many industries, specifically labor intensive or low productivity industries, as prices increase to pay labor and global demand drops in response. High labor productive may survive, albeit probably with less labor in order to maintain margins, while unproductive industries will die. How is that beneficial to no and low-skill labor?
Kai
Kai,
Wages are not sold to the ultimate consumer directly like soybeans. The price of labor and capital combine to make up the price of a manufactured product. Only if employees are capable of withholding their input to production to try to extract a better price from the consumer, may we say without reservation that labor’s price is the maximum the market will naturally pay — that a minimum wage would be out of line. Of course, we would not need to say that — the consumer (the market) wont pay enough to keep truly artificially high firms afloat.
In the case of a minimum wage which you sound like you are addressing, pathologically de-unionized American labor may be extracting much, much less (*) than the consumer would be willing to pay — for a very large portion of our labor force.
Easy way to settle what the market will naturally pay: combine broad unionization with centralized bargaining (where all employees doing similar work negotiate one common contract with all employers) — the only way employees can effectively withhold their input to get the best price.
IOW, anybody who doesn’t like the government setting a minimum wage should support a lot more unions. 🙂
* * * * * * * * * *
(*)
yr..per capita…real…nominal…dbl-index…%-of
68…15,473….10.74..(1.60)……10.74……100%
69-70-71-72-73
74…18,284…..9.43…(2.00)……12.61
75…18,313…..9.08…(2.10)……12.61
76…18,945…..9.40…(2.30)……13.04……..72%
77
78…20,422…..9.45…(2.65)……14.11
79…20,696…..9.29…(2.90)……14.32
80…20,236…..8.75…(3.10)……14.00
81…20,112…..8.57…(3.35)……13.89……..62%
82-83-84-85-86-87-88-89
90…24,000…..6.76…(3.80)……16.56
91…23,540…..7.26…(4.25)……16.24……..44%
92-93-94-95
96…25,887…..7.04…(4.75)……17.85
97…26,884…..7.46…(5.15)……19.02……..39%
98-99-00-01-02-03-04-05-06
07…29,075…..6.56…(5.85)……20.09
08…28,166…..7.07…(6.55)……19.45
09…27,819…..7.86…(7.25)……19.42……..40%
10-11-12
13…29,209…..7.25…(7.25)……20.20?……36%?
Kai’s theory depends on the ability of management to enlist government to use its power — or let management hire its enforcers and stand aside as they inflict whatever violence is necessary — to prevent workers from pursuing their own best interests by banding together to negotiate with owners the distribution of revenues created by labor and capital. Of course, it also ignores the simple fact that the power of owners is also enhanced by government by allowing businesses to organize themselves in corporate form. It’s laissez-faire with a hidden thumb on the scale against labor. It’s OK for the business owners to organize into a more powerful entity, but not for labor.
Kai’s argument ignores an even more fundamental issue.
Ultimately the price of labor clears. But WHERE it clears has a bottom bound, which is to say at ‘subsistence’ as that is defined in any given economic system. As long as there is enough supply of labor employers can always force price down to the lower bound of subsistence, because at that level there is no realistic option of withholding labor services. And someone will take the job.
The idea that labor wage is set at marginal productivity of labor only works if there is a general balance between the overall supply of labor and labor demand such that labor AND employers can simply walk away from the contract. If labor supply is out of balance either to the up side or down side than the more basic law of supply and demand of LABOR ITSELF comes into play.
Adding to the complexity is that even this basic law historically is not allowed to come into effect at times of labor scarcity. While employers are almost always and everywhere free to use the lower bound of subsistence to extract low wages from labor in time of labor abundance, workers have rarely if ever been able to use simply labor scarcity to force higher wages at simple clearing levels. Instead employers have been able to call in the powers of the state to enforce “traditional” wages at the point of a bayonet.
The key example for me is the English Statute of Laborers of 1351
https://en.wikipedia.org/wiki/Statute_of_Labourers_1351
It was enacted in response to the labor shortages attendant on the Black Death of 1347 that more than decimated European populations. The Act prevented BOTH workers from demanding and employers from offering more than ‘customary’ wages. And one version or another of the Act remained on the books for the next 550 years or so. And yet in all that time not a single employer was prosecuted under the Act even as ANY attempt at collective bargaining was considered a violation to be punished by law or by simply black-balling from the industry or more large scale acts like the Peterloo Massacre.
All this entirely irrespective of any calculation actually made on the basis of “marginal labor productivity”. As such the idea that the market simply sets wages in relation to simple metrics of productivity is total nonsense, even if there was no governmental thumb on the scale. Because the first order effect is that of market clearing against the lower band of subsistence and then of simple supply and demand of labor. With the top of that lidded by State power in the form of criminalizing collective bargaining.
The classical model assumes a set number of sheep herd owners negotiating with a set number of sheep herdsman with higher pay set by labor skill and with no possibility of a employer cartel or employee association to set wages collectively above or below that average skill level/productivity level. Works on a chalkboard but not in any actual labor market ever anywhere. There are always power relations built into the fundamental equation of labor clearing which is one level below that of actual labor productivity. That is there never is and never will be a ‘free market for labor’. And certainly not one based on actual marginal labor productivity.
Bruce:
Excuse a one handed typist as I have an IV in the other arm. Why back so far for an example . . . English Statute of Laborers of 1351? I know you as an Historian; but, why not use more current data from 2001 onwards. Some would blame retirement and adjust for such in their calculations to explain away the drop in PR. I believe it to be more complex than such as we see the decrease in PR with an increase in Disability claims and little corresponding retirements till much later in the process going forward. People can not afford to retire. Disability is no great shakes either and more people stay in the Labor Force rather than take it.
Marginal Labor Productivity as Spencer would point out has gone to Capital at the expense of Labor and in many cases “mindless capital” having little impact on the overall economy other than to a few. Nice write up and I enjoyed the read. Confined these days and it is boring. Hopefully, I am free again soon.
Bruce Webb: “…But WHERE it clears has a bottom bound, which is to say at ‘subsistence’ …”
And what is the definition of work compelled at subsistence? I call it free range slavery. When the only option aside from suicide lies in working at subsistence, what else would you call it?
Now, business might feel that they should pay as little as possible in return for labor, and any individual business will benefit if they can undercut others. But what they can’t address individually is the overall effect on the economy and the community of pushing the whole population as close to subsistence as possible.
This is why setting wages and labor conditions must be done by a government — to cultivate a society in which businesses can all do well, without the omnivorous goats of the economy nipping the grassroots right down to the dirt. It surprises me that anyone wouldn’t see this.
Noni
How hard is it to understand that 60 people speaking through a representative have a louder voice than one person talking one-to-one to a big boss man? Duh. People who have never seen an effective union in action can’t imagine the difference it makes in working conditions, workplace safety and simple equity in the lives of the workers.
Bear in mind that I fought daily, tooth and nail, with a long-time union rep who absolutely hated my whole being– hair, hide, hooves and all. Trust me, I know whereof I speak when I say you learn early on not to screw anyone out of anything. Or not even to just inadvertently fall into a mistake. I became a better labor lawyer than the HR guys I called for advice. Put it this way–if I had then the support from an organization like AFGE, I would have become the Commissioner of SSA toute suite. Hated the rep. Loved the union. NancyO
For history I like to go to The Making of the English Working Class by Thompson. Before industrialization individual cloth weavers earned a decent living — bargaining on an equal power basis with individual purchasers. Came the steam looms — making them as much as 100X more productive — they and their families were reduced to eating oat cakes three times a day because they couldn’t afford wheat bread; forget mean I suppose.
If the weavers had been capable of withholding their input into the much greater and cheaper output via a combination of union density and centralized bargaining, they would have been able to share in the overall prosperity brought about by industrialization.
(No need for Karl Marx. I have read that Marx said America doesn’t need socialism because it has labor unions.)
To me a truly free market (or labor market) should only be understood to exist if and when labor is able to withhold its input into production to squeeze the ultimate consumer (not ownership) for a higher price. Nothing for anybody to fear: the overall result is that pure consumer preference gets to decide the composition of overall economic output — not “artificial” bargains for the better off made possible by squishing the meager incomes of the worse off.
Denis I just bought my second copy of Making of the English Working Class. It is absolutely the indispensable book on this topic.
Run as to why to go back to the Statute of Labourers. Because it is important to understand that pace Marx none of this has to do with the rise of Industrial Capitalism as such. That is none of this started with Adam Smith.
There are some odd beliefs that somehow ‘Pre-modern’ and ‘medieval’ somehow equate to a non-monetary traditional economy encapsulated in the term ‘Feudal Society’. Whereas ‘feudalism’ as such was mostly a myth and certainly never an actual ‘mode of production’. That is both broad economic doctrines of Marxism on the one hand and Classical Liberal Economics on the other (i.e. Chicago/Freshwater) rely on a historical model that has everything stem from the institution (in both senses) of Industrial Capitalism or at best the implementation of Finance Banking in late medieval times, but in any event with a particular vision of big C Capital that is intrinsically ‘modern’ i.e. ‘post-medieval’. It just ain’t so. The roots of social, economic and paleo conservatism go back far beyond that and attempts to resolve the issues in ways that are blind to pre-modern economic and social structures are part of the problem and not some sort of simplifying solution.
As to trying to find some answer in post-2001 data. Well words fail. At least me.
Labor gets paid only that which it can take. Which is why unions are necessary in order for labor to capture some income increases. As Adam Smith noted in Wealth of Nations, wage increases are additive to costs, profit margin increases are a multiplier. Increasing the profits of capital is more expensive than increase wages. We’ve had profits increase so there’s little to no income available for wage increases. We could increase wages, and still have income for profits. But then capital wouldn’t be able to take home all the cake. And we can’t have that.
Drew,
You state, ‘Wages are not sold to the ultimate consumer directly like soybeans.’
The wages of farmers, fertiliser, tractors (and labor that goes into them), water, capital (land), intellectual property (modified soybean patents), transportation, storgage, wages of sales people, wages of brokers, etc. are also not directly sold to the consumer…they are indirectly built into the price of the soybean. Just as the labor in the pair of socks bought by your average Wal-Mart shopper is built into it. In fact I am thinking of writing a book, ‘I, Soybean’
The price of labor at all junctures of the value chain combined with capital that results in soybeans ending up on my table (or more likely feeding my pigs) is what helps determines the cost side of a product or service. But at that cost point, it does not follow that consumers will pay that cost price given means, preference, and alternatives/substitutions. It is the consumer, not the employer who is the ultimate determiner of price as they vote with their wallet.
You continue, ‘Of course, we would not need to say that — the consumer (the market) wont pay enough to keep truly artificially high firms afloat.’
You mean artificially high labor prices afloat. True. And we have seen that in the 1970’ s (and now)when the US’s artificially high labor prices either forced companies overseas, or forced them to dig a grave and climb in. Like I said, our labor competes globally as do our products. Artificially high returns to either labor or capital, relative the rest of the global market, ill result in that firm being at a competitive advantage and ultimately failing. The market (consumers and other sellers) keeps the owners of labor and the owners of capital honest. These charging too much go under.
You go on to make point about min wage, first of all let’s all agree that everyone one this thread thinks that more money for labor is a good thing. I would love to see labor get as much as they want, However, just because I want them to have more does not mean they are worth more and deserve more as determined by the consumers (the ultimate payer of wages).
Why do you cherry pick 1968 as the year to start an index on min wage. Was that a particularly good year to be poor or a consumer or a worker? Let’s be intellectually honest for a change and go all the way back to the inception of the min wage and track the index from then.
In any event, as the good man Henry Ford once said, ‘“It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.”
K
Urban Legend,
You state, ‘Kai’s theory depends on the ability of management to enlist government to use its power — or let management hire its enforcers and stand aside as they inflict whatever violence is necessary…’
Quite the opposite, as I point out, the market (the seller, consumers, other competitors, as well as labor and its alternatives, and other choices) that determine the market. The seller alone is kept honest by the other forces in the market and the FREEDOM of labor and consumers to go elsewhere if the seller (capitalist) is too greedy. My theory depends on freedom and the power of choice. Perversely, state-protected unionisation robs people of choice and power and allows unions, through the threat of state force, to force sellers to pay an above market price and robs labor of the choice to self represent. When that happens, the other forces in the market (the consumer, competitors, alternative choices, etc) all combine to drive that seller (capitalist) out of business. Now both labor and the capitalist are worse off.
Like I said, legislative law does not trump economic law.
Labor can organise, and it often does to get things it needs. However, state-mandated unionisation is unfair to labor (robbing them of their freedom and right to associate with whomever they want) and it is unfair to the owners of capita and businesses, forcing them to buy a good (labor) from one buyer at a non-market price. This is simply state-coercion. Corporations have no such power to force you to work for them and the state does not compel you to work for them. You misunderstand the inherent unfairness in todays American economic system skews in favour of labor, not owners of capital…which is why they are going elsewhere to do business, and rightly so.
K
Bruce,
You state, ‘Ultimately the price of labor clears. But WHERE it clears has a bottom bound, which is to say at ‘subsistence’ as that is defined in any given economic system.’
That is not true and you have a poor grasp of economics if you believe that. It is actually quite possible for the clearing price of a particular product or service (including labor) to clear at a price either higher or lower than some ‘subjective’ determination of subsistence. In my industry, banking, the industry will not clear at a subsistence level….there will be an excess amount of open jobs and no qualified takers. Also, there are other industries or markets where the consumer does not value the product being sold and where the price of labor clears at a level below a subsistence price. And it is ultimately the consumer that determines the price of labor and they vote with their wallet constantly, providing feedback as to the appropriateness of the cost of labor and other factors of production or services. If I have to take sides between labor and the consumer, i will choose the consumer.
You state, ‘the idea that labor wage is set at marginal productivity of labor only works if there is a general balance between the overall supply of labor and labor demand such that labor AND employers can simply walk away from the contract.’
Perfectly operating markets would provide the pricing information that would balance the market. The key is that government needs to get out of the way so the market actually equilibrates. In other words, no min wage, no union rules, and no welfare (which increase the reserve wage of labor). I am sure that is what you would like to see so that the markets and the demand and supply of labor organise in a way that the the market clears, right?
You continue, ‘If labor supply is out of balance either to the up side or down side than the more basic law of supply and demand of LABOR ITSELF comes into play.’
Which is generally caused by government interference in the market which creates either a glut or scarcity of labor at some specific, and artificially created, price point.
You continue, ‘While employers are almost always and everywhere free to use the lower bound of subsistence to extract low wages from labor in time of labor abundance, workers have rarely if ever been able to use simply labor scarcity to force higher wages at simple clearing levels.’
Let me rephrase that for you: Employers should be free to charge whatever price they feel they are willing to pay and labor should be free to either take that price or not. The fact that labor is in abundance and market wages are at the subsistence level is not caused by that specific employer….if anything his/her entrance in the market helps reduce the supply of labor which makes it more scarce and HENCE MORE VALUABLE. So bring on MORE low-wage employers, let them hoover up all the excess labor and create conditions whereby any new entrants to the market must charge more to pull labor away from existing employers and hence the whole price floor raises. Problem solved!!
I am not going to comment on British history from 1351. I will ay that any enforcement of laws from back in that time for 550 years seems a bit suspect to me and I would not be surprised if there is more to that story than summarised above. And other factors other than that law.
K
Kai I don’t see that you even attempted to understand my argument.
Obviously there are various levels at which labor markets can and do clear. And a lot of that has to do with the fundamentals of supply and demand. But labor markets cannot clear below the level of basic subsistence, not for long anyway, because that means that your labor force would literally starve and/or freeze to death. And there is nothing “subjective” about that.
Perhaps the problem here is that you don’t understand the meaning of the word “subsistence”. Because i can make no sense at all of your deployment of it in the following:
” In my industry, banking, the industry will not clear at a subsistence level….there will be an excess amount of open jobs and no qualified takers. ”
That is I can only make sense of this if it means that your industry will have unfilled jobs because it is not even willing to hire people at subsistence wages because they don’t have the appropriate skills. This is absurd. If you really have open jobs and a huge pool of unqualified workers the answer would be to hire the least unqualified worker under a training wage that would be at least subsistence. But this doesn’t make any sense in a real world environment. What it would argue for if anything is funding of a training or apprenticeship program to fill the pipeline for entry level workers.
Frankly you are just spouting talking points, er I a mean “principles” as they are typically found in a standard Principles textbook like the multiple versions of Mankiw’s where he just presents assumptions as if they are axioms/laws of nature and then builds from there.
Your second to last paragraph makes no sense at all except in light of your last one. Since you clearly have zero understanding of the history of labor markets you are forced to fall back on the cartoon version. In particular the whole idea of a employer cartel setting wages with or without the explicit backing of state power clearly escapes you.
As noted above E.P. Thompson’s Making of the English Working Class would make for an excellent start. And he doesn’t even go back as far as 1351 but instead starts at the more standard place of 1792 or immediately subsequent to the American and French Revolutions.
But feel free to just treat Friedman’s Capitalism and Freedom as if it came down on a third tablet from Sinai. Because clearly that is the source of your Chapter and Verse.
Bruce:
Thanks for the lengthy response. I appreciate the effort.
Sorry but you were right, I did not understand your initial argument. You claim is that the GENERAL market AS A WHOLE cannot clear below a subsistence level FOR EVER (or at least a long time because everyone dies)? Is that right?
If so, a few points:
Labor is not a uniform amalgam that is undifferentiated. Likewise employment is not some uniform construct in which all jobs and tasks are the same that can be handled by some lumpless form of labor. Left on its own, labor and employment will equilibrate at a point in which labor wages are graduated based on the value of the differentiated labor.
Is that a point below a subsistence level? Highly unlikely and even in countries without min wage laws and unions, you never see prices being driven below subsistence levels in practice. A case in point is Hong Kong where I live and work. After much soul searching we just enacted our first min wage law two years ago. Despite the late adoption of the law, at the time Hong Kong had a higher median wage than the US (on a PPP basis) and an unemployment rate of around 2.8% (1.7% if you included part time work). This is the case in other markets too.
But back to your theory, if the only jobs being offered are at or less than subsistence level jobs, why would I do them? Why wouldn’t I forage or hunt? Why would greedy capitalists let that useful labor be repurposed to hunting and gathering if there is profit to be made from employing it? And wages will continue to equilibrate upward as long as profit associated with labor is still present within the market price. Greed on both the employer/capitalist side and the labor side will ensure it is so.
On the employer side,if I had a chance to hire labor (briefly) at the low subsistence level that allowed me to gain excess profits, why wouldn’t other greedy capitalist enter the market and compete that labor away from me at a higher price (in a perfect market of course)?
You state, ‘This is absurd. If you really have open jobs and a huge pool of unqualified workers the answer would be to hire the least unqualified worker under a training wage that would be at least subsistence.’
Wow…so you mean, a company realising that it needs good qualified labor, spends money to train, thus improving the human capital of a worker that previously made a subsistence wage…. But wait….once investing so much money to train up this heretofore useless (and only worth subsistence wages) by putting the labourer through Harvard to get an MBA, thus making him capable working on the trading desk in derivatives….what is to stop so other greedy capitalist, say those meanies at Goldman Sachs from coming over and poaching my labor since I am only continuing to pay him a subsistence wage? er…wait….unless….in the process of training him, i also increase his wage to reflect the value he is to the firm as a derivatives trader that makes hundreds of millions for the firm. Uh oh….seems wage trend UP not DOWN when those mean capitalists compete for profit in the market. NOTE TO SELF: If being paid a subsistence wage, please hope that I gain employment AT ANY WAGE, just for the training and skills I will garner that will increase my human capital.
Not sure your point on Mankiw, pretty much anyone educated in Economics understands and accepts those principles. He did not make them up more is he the only one that uses them in classes. Everyone does! Even Krugman for the most part. Read his text and writings on labor, back when he was still an economist and not a political, and highly partisan, blogger.
Finally you last point on the history of labor markets is extraneous. If you have a historical event or period that makes your point. Put it forth. So far what you have put forth is unconvincing that is all I am saying.
K
Kai:
Are you in manufacturing?
Kai,
If the truckers who deliver your soybeans go on strike and are able to squeeze higher paychecks out of you — because centralized bargaining prevents you from pointing to a non-union soybean seller down the road who will undercut you and the unionized drivers and drive both of you out of business — and you are forced to raise the price of soybeans AND customers accept the higher price …
… would you have any systemic objections to that.
This little point we are arguing about here is the alpha and the omega/the beginning and the end of all arguments on how we need to run this country. I suspect you agree with that.
Run,
I am in investment banking,and we invest heavily in private equity manufacturing globally as well as in publicly listed manufacturing. So, yeah, I guess I am in an indirect sort of way.
Prior to that I worked with a lot of manufacturers as they set up in China and elsewhere. I think I have a pretty good understanding the drivers of manufacturing profit from both a capital structure point of view, taxation, regulatory, as well as well the dynamics of labor as an input into the final product.
Why?
K
Because you are working it from a Financial and Economics point of view. Direct Labor Cost is not the issue.
Denis,
To answer your question, yes I would object to situation above. Why should the consumers be FORCED to buy from one supplier.
What if the government stated that you could only put your money in Goldman Sachs and that you could not put your money in a local cooperative bank? I am sure you would object also.
The consumer’s rights should paramount. They should not be forced to pay more and live a lower standard of living so soybean truck drivers can make more and live a better standard of living. Right?
K
Run….eh….not sure I get your point.
True, I am looking at it from the economic point of view and that is the only way you should look at it. You cannot artificially pay labor more than its market value, either people substitute out for other goods or services, do without, or a competitor (most likely global) undercuts you on price (because of its lower labor costs) and you go out of business.
You have two choices when faced with more competition (from competitors with lower labor costs) and price point that you cannot control (it is set by the market): make your labor more productive (more output for less labor as the car companies have done over the last few decades…this is mainly done through robotics but not always) or dig a grave and climb in (as done with many American manufacturing companies in the past). You could also lobby your government to protect your market, but all that does is make you more inefficient and in the long run destroys your global competitiveness. And it is the global market in which we compete, not a local one.
One thing that does not change is investor expected returns. Because capital is highly mobile and fungible, if a manufacturing business does not provide an appropriate risk-weighted return, that capital will flee that business and industry and go where it will get that better rate of return. Labor loses out as that business shutters. You cannot penalise capital without penalising labor.
Is there another way to look at it?
K
K:
Again Direct Labor Cost is not the Issue.
Run,
Could you please elucidate. Why isn’t it the issue and, if not, what is the issue?
Labor costs is the issue on which I was commenting. To what issue are you commenting?
K
Define Labor Costs.
Kia,
You are a very hard headed banker (uh; of course, bankers are supposed to be). 🙂
Let’s try again. Imagine a simple market (easy for cab driver imagination) where cloth weavers sell their wares to clothing sewers — many individual sellers, many individual buyers. Prices set at the mutually comfortable level — as in a level at which seller and buyer are equally happy/unhappy. At what other possible level?. Came the steam looms. …
… But wait. I heard a lecture today (by a Hathaway vice-pres yet) which described how investors in steam looms expected to recoup their money in three years and reap the bounty of mechanization for seventeen more. Only to discover of course that the bounty would be reaped instead by consumers — as competition drove prices down. …
… Back to the post-steam loom — separate employees from bargaining directly with the ultimate consumer — labor market. It’s almost too simple to describe. Steam loom operators did not — could not — set the price of their labor at the mutual comfort level with the ultimate consumers — who benefited from the price competition noted above and could surely have afforded to pay a few extra bob. Labor’s price was set instead at bare subsistence level — take it or leave it; we can hire the next starving sod who comes along (not very comfortable). Leaving loom operators families living on oat cakes three times a day because they could not afford wheat bread (forget about meat from my readings).
Kia, unions in centralized bargaining labor markets tend to set labor’s price back at mutual comfort level with the ultimate consumers. Not forcing consumers to live poorer while they live high on the hog.
(don’t read this)
Over hill, over dale
We will hit the union trail
As the Teamsters go rolling along
And it’s high, high, hey
When we want a raise in pay
We shout out our grievance loud and strong!
Denis,
Again, your response just further supports my point which is that the market will not allow labor to be paid more than it i worth. The market, not the employer determines the wages it is willing to pay.
In your example, innovation resulted in creative destruction…ruining the industry of the skilled artisans that used to weave and opening up the industry to unskilled labor that simply had to run an automated loom. The result was a glut of new product (increased supply) while consumption stayed near constant…thus resulting in an attendant decline in the wages that went to labor and returns that went to capital. Both capital and labor took a hit on the value of their inputs. The consumer took almost all the gain.
Thanks for pointing out how capitalism rewards the consumer, allowing them to work less while buying more.
The best part about your story was how unskilled labor won! Previously weaving took some skill. You apprenticed, you joined the guild, you sold into the guild. Or you learned from your family and then you ran a simple cottage business. This limited and highly selective industry made it difficult fr the unskilled to earning this industry….but wait for it….wait for it….capitalism thwarted those nasty guild members and greedy independent producers and opened the industry up to anyone…and paid them for it.
Good news indeed.
If you hate the mill owners for disintermediating independent weavers, then you must really hate the internet for allowing you to respond to me via bits and bytes rather than the silk paper, wax seal, and fountain pen you would have bought from independent makers of those products….er wait….
Finally, unions are not the answer to this type of innovation. It was not the mill owners who made the labor going into weaving less valuable, it was the innovation. Guilds could to stop it and unions did not either. The attempts of unions to drive up the wages of garment workers in the US is what drove that industry overseas…not because capitalists want to avoid paying American labor more but because they CANNOT pay labor more and still compete globally. And we live in a a global market now.
Unions are job and industry destroyers. But thanks for pointing out how it was the capitalists that broke the nasty stranglehold that weavers had on the consumer, allowing buyers of textiles to live a better life for less money. All praise the capitalists!
K
Kia,
Consumers are employees too. Also, I doubt how much individual weavers should be defined as skilled — no early 19th century machine could replicate high skill.
All I can say is that a market that clears at a mutual comfort level results in a much more comfortable world for the great majority to live in (sort of by definition) than the kind of market we currently have in the US that clears at the least level above subsistence that can be paid. The economic — and political — race-to-the-bottom results are too well known to need repeating here.
Kai,
“You cannot artificially pay labor more than its market value,…”
This is true, but then this entire thread is not really talking about what the market will bear, real or not but instead is about market structure.
Your position seems to be one that there is something natural as in Mother Nature natural about a or the market and it or their existences.
Denis,
You state, ‘Consumers are employees too.’
True, but that does not mean you penalise all consumers of one product to protect the small few of consumers that make that product.
America’s manufacturing force is about 9% of the total US work force. Why should the other 91% be forced to live a lower standard of living and work longer hours to subsidise these freeloaders? More importantly, a lot of the stuff we manufacture is consumed by OTHER PRODUCERS! Wanna protect steel, you hurt cars and white goods producers, wanna protect weavers and textiles, you kill off the manufacturers of t-shirts, socks, bedding, fashion, etc. You kill jobs and hurt the consumers in the other 91% of America. The consumers are employees too argument is, economically speaking, weak.
You continue, ‘I doubt how much individual weavers should be defined as skilled — no early 19th century machine could replicate high skill.’
Individual weavers were skilled relative to the labourers who displaced them in the factory is the point. The skill that went into weaving went from ‘knowing how to weave’ to ‘knowing how to show up on time when your shift started’. Right?
You state, ‘All I can say is that a market that clears at a mutual comfort level results in a much more comfortable world for the great majority to live in (sort of by definition) than the kind of market we currently have in the US that clears at the least level above subsistence that can be paid.’
You are right for a change! Exactly right! and that is what happens in market where the government does not inject itself between the negotiations of willing sellers and willing buyers of labor. The greedy labourers will do what they can to maximise the worth of their labor and will be mobile until they get to a point a price point they are comfortable with. How do we know they are comfortable with that wage, because the righteous capitalist that employs them cannot FORCE them to work for him, he can only entice them with wages to which they must agree using their own free will. You have a problem with the poor and hungry being allowed to sell their labor at whatever price they want and having the freedom to work for whomever they want? Why are you so anti-poor that you want to strip them of their property (labor) and their freedom (job choice).
You conclude, ‘The economic — and political — race-to-the-bottom results are too well known to need repeating here.’
Actually it is the capitalist market forces that cause a race to the top. As more capitalists enter a market in search for profit, capital becomes more abundant relative labor, and labor becomes relatively more valuable. It is the reason that capital-intensive economies, e.g., Switzerland, the United States, Hong Kong, Japan, etc have high wages relative to capital-scarce (labor-intensive) countries like Nepal, Bangladesh, Pakistan, etc. It is also true that wages go up as capitalist institutions are adopted (private property, rule of law, etc) and capital rushes in, such as China and India, and others where capitalist institutions and reforms have been adopted. Capitalism is what causes the race rot the top and it is why more people have been pulled out of absolute poverty over the last three decades than any time in history. Race to the top!
You should be begging for more free markets and more capitalism if you want a race to the top. Centralised planning and artificial wage floors only hurt the poor and the unskilled the most, that causes the death spiral to the bottom.
K
Daniel,
The article above is about Krugman’s support of the living wage and how laws supply and demand is not necessarily applicable in the case of labor.
That is to what I am commenting. Wages, and supply and demand do ho hold, labor is not different from any other good or service.
To what ‘structure’ are you referring?
K
Run,
Why don’t you define it and I will tell you if that is my understanding.
K
K;
You are making some pretty broad based assumptions and I want you to explain what you are calling Labor and Labor Costs. I serious doubt there is anyone here (including yourself ) who works in actual manufacturing or providing a product.
Run,
You are right, I am trying to keep this as broad and non-specific as possible and talk from a principle-based approach, i.e, demand curves slope down. A move up in labor costs, such as wages or wages + benefits or wages + benefits + taxes + other indirect costs will result in an impact to the quantity of labor demanded or the productivity required to keep labor demand constant, everything else ceteris paribus.
A case in point is that although wages have been stagnant over the last few decades, once you take into account benefits and insurance contributions, remuneration to employees (labor costs) have increased. The cost goes up so productivity must companies leave the market.
Another case in point, Obamacare is an additional cost to labor, we expect to have an attendant negative impact on the quantity of labor required at the margin, ceteris paribus. And it is what we are seeing. No surprises.
The demand for labor, as with any commodity or good or service, slopes downward. That is the principle to which I am defending. As I stated above, Krugman, when he was still a sane economist, understood this. Nothing has changed since he has become a partisan blogger that changes that fact. And again, legislative law cannot true economic law. Raise the cost of labor, ceteris paribus, and its demand will drop as consumers of it either do with less, substitute out for other factors of production (robots) or move to where labor is at or near the real market rate require dot compete globally (China, Mexico, etc).
If that is not the case, please put forth why it is not.
K
K;
So you are burdening Direct Labor and making your case on Burdened Labor? What is the difference? And what has been happening to Direct Labor and the amount of it necessary to manufacture? I do throughput analysis for manufacturing globally.
By the way, you make an excellent argument to call corporate income, personal income and tax according as the owners are consumers of the public infrastructure (side issue).
Where are you? You with the commoners on Kowloon where I would likely stay (Royal Garden) or hobnobbing over on Hong Kong? Did they build up the peak? Haven’t looked or been there for a while.
Kai
“To what ‘structure’ are you referring?”
The structure of the economy. Taking my prior post, and your reference to ” true economic law”, I repeat: Your position seems to be one that there is something natural as in Mother Nature natural about a or the market and it or their existences.
Your analysis as was Krugman’s in the past seems to stop right before we start the part of the discussion where the increased income in the hands of the labor group (those who earn income from labor, physical or cognitive) has it’s effect on an economy.
There are no “laws” of economics other than what the state produces. There are expectations of how people will react with their money, but they are expectations and thus ” ceteris paribus” is applicable only for a moment in time or simplistic models.
Run,
You ask, ‘So you are burdening Direct Labor and making your case on Burdened Labor? What is the difference?’
I am simply pointing out that the demand curve for labor slopes downward. Do you not believe that to be the case? If not, why not?
The definition of labor costs, direct burden vs burdened, etc…is extraneous to the main principle, which is—before you ask again—that labor is not different from any other factor of production or commodity or good or service. The demand curve for labor slopes down! As it does for capital I might also add and steel, and bananas, and robots, and water, and etc…
I agree on your second point which is that income going to the owners of businesses should be taxed once, and that should be at the personal income tax level. As it stands now, they are taxed at the point of sale, then at the corporate level and then at the capital gains level. Excluding sales taxes, the average tax rate for your owner of a business is over 50%, give or take, depending on location. No wonder they are going elsewhere. They are paying more than their fair share.
I am actually on Kowloon side, in Tai Kok Tsui (which is just outside of Mongkok if you know the area). I have lived in China for most of my life (though I was born and raised in North Dakota and later Arizona).
The Peak is what it was…a high-end residential area. I hike it on some weekends but nowadays tend to hike more in Quarry Bay or Saikung.
K
K:
The difference?
– Direct Labor is the true cost and the true amount of Labor in making a product or creating a service.
– You conflate the cost of Direct Labor with extraneous cost or Overhead in the calculation. It is almost an “apples to oranges” comparison when you look at the difference in Overhead by country. Labor is not responsible for the Overhead costs of a country especially those which are legislated. In the manufacturing process, I can not change most Overhead cost.
If you are going to argue the costs of direct labor by country than you must look at direct labor cost only to measure true cost and efficiency and set aside the Overhead of operations within a country.
There is also a misconception of the ratio of direct labor within the product when the additional non-related direct costs are burdened to labor. Direct Labor as a part of the cost of a product has not been greater than 10% for decades. This is a factor most economists and financial people gloss over when accusing Labor of higher costs.
Think about what I am telling you. Arguing what constitutes Direct Labor cost without understanding the components of Labor Cost or generalizing it into Labor Cost will not improve efficiencies of output (if you are truly concerned with downward sloping Labor/Capital needs). It clouds the picture. Have you ever been to “Eight Plus 1” in Shuzhou? Who do you think funded the manufacture of the casting plant and the machining plant? Is that burden to Labor?
So what do we do with all of that legislated and customary burden?
Aside: I would come into China at Beijing and spend some days in Tianjing visiting manufacturing plants. I would drop down to either Shantou, Shenzchen or Shanghai and visit more plants and suppliers also. After a bit, I would drop into Kowloon for a week end (add a day or so) to relax and do a walk-about and hydroplane over to Hong Kong. Fascinating place-China. I was always grateful for their command of English as compared to my smattering of Chinese.
Daniel,
Your response was a bit convoluted and difficult for me to understand. I will let you continue your responses on structure. I have no interest in that discussion.
I am simply pointing out that the demand of labor slopes downward like any other good or service. It does. If it doesn’t and you can prove it…by all means send through the evidence. I am always open to some new research on the subject that upends centuries of settled social science.
K
Run,
I conflate nothing since I am indifferent to the definition utilised. I am simply pointing out that if the cost of labor goes up, ceteris paribus, the demand for it will drop. This holds true despite the how you measure that cost. If that is not the case, please prove it!
I agree that other factors of production and costs also have an impact on where manufacturing is located and I never claimed otherwise. And in many cases those costs can have a bigger impact on the manufacturing calculus. Again, I would never claim otherwise. That is why I am sticking only to the principle that higher labor costs equate to less labor demanded CETERIS PARIBUS, meaning we hold all those other costs and factors constant and ONLY consider the cost of labor (using any measurement as long as it is the same both before and after the increase). The principle holds just as does for any other factor of production and/pr cost associated with that factor of production.
That is great. I lived in Beijing for 10 years and used to set up manufacturing facilities for various auto companies around China. I know all the areas of which you speak well.
The old China I used to know (I first came as a student in 1989) is mostly gone. I spend as little time in the big cities as possible now days and mostly travel in Yunnan, Guizhou and Sichuan whenever I have free time. I like spicy food.
K
K:
In your explanation, the blame is laid upon Labor as the cause of those costs when in reality it could be blamed upon the customary practices of the country. Chinese, Thai, Filipino, Malaysia, etc. facilities may offer two meals a day, a nurse on staff, and transportation as part of the benefit. In comparison, the US goes well beyond this and much of it is legislated. The efficiency of manufacturing is not governed by either offerings. To claim a vast efficiency overseas as many do is patently false as it does not mostly exist except in the parameters of ~10% and then would such make it profitable to move overseas and install a 5 week supply chain?. We are discussing mostly Overhead and not Labor. Other things are not equal when taking into consideration practices of countries. Neither does it have an impact to throughput efficiencies unless one wishes to begin to discuss Chapman.
Sticking only to the principle is confusing to most as they lose the dynamics. You gotta explain. What is the intent of China? To rise to the same level of offerings to its citizens or bring the US down to its level. (Lost some of my thoughts here as the nurses and doctors and others have been bugging me.)
Are you Chinese my friend? I am assuming so. I started going to Asia in 98 when as you said most of the old Asia was still in existence not yet taken over by tourism. I do not mind spicy; but, I kind of stop if it makes one sweat. I had some time to tour which was interesting. I am amazed at the friendliness and the accommodating manner of Asians. They are certainly curious of us. I like bringing them home with me for an evening.
(apologies for duplicating this item from the open thread but I realized after the fact it may have some relevance here…)
In other employment news, Computerworld reports that the Immigration and Naturalization service hit the FY2016 cap on H-1B visas in the first week of April. I guess that’s the consequence of an unemployment rate under 1%…. No, wait…
http://www.computerworld.com/article/2907056/h-1b-cap-is-reached-with-high-number-of-visa-requests.html
Maybe someone can ask Madame Secretary what this indicates for the future employment prospects of recent STEM graduates. Soon please!
Run,
You state, ‘In your explanation, the blame is laid upon Labor as the cause of those cost…’
Quite the opposite, I am indifferent to whom is to blame. I am merely pointing out that, ceteris paribus, if the costs of labor (however that is measured and to whatever degree you want to measure it) go up, demand will go down. Again, this is a ceteris paribus argument, all else is held constant. That is a simple economic law that cannot be superseded by legislative law. It holds always. The demand curve for labor slopes downward, just as it does for all products or services, regardless of the reason for the increase in labor costs, whether that be from legislative fiat, divine intervention, labor union activism, unicorns, etc. If you can prove that principle does not hold, then prove it…you will win an Nobel in Economics if you can. Even Krugman, who won his Nobel showing that international trade in open and free markets is good for everyone, can’t challenge this law in any serious way.
I am talking only the cost of labor. I agree that other factors come into play, taxation, location, unions, infrastructure, capital investment and productivity, tariffs, non-tariff trade barriers, etc. I am not disputing that. These other factors are the reason that many people believe that the principle above does not hold. They see wages go up with no IMMEDIATE discernible impact on employment and therefore think that the above principle does not hold. But what they are seeing is adjustments in the production and service structure that offset the impact of the wage or labor increase. Something else is forced to give to accommodate the increase in wages, and when there is no room for adjustment in the other costs, then companies have two choices…move overseas or dig a grave. Many an American company in the past, chose to dig a grave.
There is only one factor in production that is immutable and that is the return to capital (profit). Force pressure on the market-determined risk-weighted return to capital from taxation, legislated labor increases, EPA-driven energy increases, etc. that cannot be offset by increases in productivity or reductions elsewhere and capital will flee that business, industry and ultimately the country. We have seen it with a lot of American industries and we will see it with yet more. It saddens me and I indirectly make a living from it.
No idea what the intent of China is, however there is no way to protect American labor from the impact of its labor on global market prices.
I am not Chinese. Grew up on the Turtle Mountain Indian Reservation in Northern North Dakota….cold cold cold.
Other than a stint in the Army when my unit was called back to duty in 1990-1991 (and an MBA right after), I have spent much of the last 25 years in China, including college and graduate school. In my opinion, it was good up until 2002. Then modernity moved in too fast. Pollution, traffic, fast food, and idiot foreign carpet baggers all followed. Oh well upward and onward…
K